Suppose a life insurance company sells a $200,000 one-year term life insurance p

Question

Suppose a life insurance company sells a $200,000 one-year term life insurance policy to a 20-year-old female for $330. The probability that the female survives the year is 0.999634. Compute and interpret tie expected value of this policy to the insurance company. The expected value is $. Which of the following interpretation of the expected value is correct? A. The insurance company expects to make an average profit of $256.80 on every 20-year-old female it insures for 1 year B. The insurance company expects to make an average prove of $29.99 on every 20-year-old female it insures for 1 month The insurance company expects to make an average profit of $329.88 on every 20 year-old female it insures for t year. D. The insurance company expects to make an average profit of $23.35 on every 20-year-old female it insures for 1 month.

Explanation / Answer

The probability distribution will be:

Hence,

Expected value for the company

= 330(0.999634) - 199670 (0.000366)

= 256.8

So,

The expected value is $256.80

Option A is correct.

x 330 - (200000 - 330) = 199670 p(x) 0.999634 1 - 0.999634 = 0.000366

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